The Week Ahead: French government幼女视频檚 woes a warning for UK
If you think the UK government is having a tough time of it, then spare a thought for the French government. It may well collapse this weekend if it loses a crunch confidence vote on its budget. Bookies put the chances of Prime Minister Fran莽ois Bayrou being replaced in the next few months at 90%.
You might be wondering what, if anything, does this have to do with us?
Well, the French government is currently running a budget deficit of almost 6% of GDP. For comparison, the UK幼女视频檚 is about 5.2%. French Finance Minister Eric Lombard needs to bring that down to meet the European Union幼女视频檚 3% budget deficit rule. The French government has tried to enact about 鈧44bn in cuts, including scrapping holidays and taxes on the wealthier. This has sparked fierce political opposition and sent the yield on French government bonds sharply higher.
Sound familiar?
Indeed, the yield on 10-year French debt has risen from about 3.2% at the start of the year to 3.5% currently. This is almost bang in line with the cost of Italian debt 幼女视频 once the poster child for poor fiscal discipline.
The irony is that even though France幼女视频檚 debt-to-GDP ratio is higher than the UK幼女视频檚 (113% vs 98%), France 幼女视频渙nly幼女视频 spends about 拢52bn on interest costs, compared to the UK幼女视频檚 bill of over 拢100bn.
The yield on French government debt is significantly lower than on UK gilts because inflation and interest rates in the eurozone are both much lower than in the UK, which partly accounts for the difference.
By contrast, the yield on 10-year UK gilts is currently 4.7%. While this is slightly below its recent peak of 4.9%, it幼女视频檚 still far higher than at almost any point since the Great Financial Crisis and much higher than the 3.5% France is paying.
Is the UK close to a debt trap?
The UK government should be watching this weekend幼女视频檚 activity in Paris like a hawk with binoculars.
The fact France has a lower interest rate, despite its higher debt ratio, is evidence that financial markets care at least as much about the trajectory of debt as well as the absolute size of it. This emphasises how important the UK幼女视频檚 fiscal rules are. If Chancellor Rachel Reeves is tempted to loosen them in the Autumn Budget in a way that raises the UK幼女视频檚 debt trajectory, then financial markets are likely to push gilt yields even higher, further increasing the interest-rate bill.
This is increasingly important because the UK is arguably close to a debt trap. That happens when the interest rate on a country幼女视频檚 debt is higher than its nominal growth rate. The result is that the debt pile grows faster than the economy. If that happens, then the debt-to-GDP ratio grows every year, even if borrowing doesn幼女视频檛 increase, making it extremely hard to escape without painful measures.
The cash size of the UK economy is likely to grow by 3.5幼女视频4% a year (1.5% real growth, plus 2.5% inflation), over the next few years. But, the average interest rate on UK government debt is about 3.9%. This leaves very little room for error.
That said, warnings of a 1970s-style economic crash and a trip to the International Monetary Fund (IMF) are overdone. The UK幼女视频檚 recent tax rises mean that the debt-to-GDP ratio is likely to stabilise over the rest of the decade rather than continue to rise. What幼女视频檚 more, inflation and interest rates will probably fall a little further next year, helping to ease the burden. In any case, the UK has the second-lowest debt-to-GDP ratio in the G7, so there is room for it to rise further if needs be in the short-term.
With the yield on 30-year gilts hitting their highest since 1998 last week, investors are clearly worried about the long-term trajectory of the UK debt burden. The Chancellor will have to be extremely careful in the Budget not to spook investors further. The government should be watching developments across the Channel closely this week, if for no other reason than learning what not to do.
Sign up to our for regular commentary and analysis on the changing economic landscape.